Mid-Market arts district: Curtains?

Proponents of a plan to turn one of the remaining derelict blocks of Mid-Market Street into a mixed-use development with art, theaters, housing and retail say the project has stalled because a key property owner backed out of negotiations.

For more than two years a nearby property owner and a group of nonprofits, including the North of Market Neighborhood Improvement Corp. and the American Conservatory Theater, have been negotiating to acquire three parcels between 966 and 974 Market St., an assemblage that includes a row of shuttered stores just east of the Warfield Theater as well as a surface parking lot behind the Warfield. The property would be combined with a contiguous site owned by the Thacher family at 950-964 Market St.

The group, which is being advised by the developer Equity Community Builders, has offered $8 million for the three parcels and plans to bankroll an arts and education center by making the project part of a larger mixed-use development with about 120 housing units and retail. The facility would feature new performing arts space, a conservatory, retail and restaurant uses and new housing on the pivotal block bounded by Market, Turk and Taylor Streets.

It was an idea that had the support of the Planning Department, Mayor Ed Lee, the San Francisco Arts Commission and District 6 Supervisor Jane Kim. William Thacher, whose family has owned the 950-964 Market St. property for generations, has also been a vocal proponent.

But over the last six months, property owner Loan Star Fund — the Dallas-based hedge fund that acquired the 966 and 974 Market St. parcels as part of a portfolio of troubled loans — has broken off negotiations, according to Elvin Padilla of the North of Market Neighborhood Improvement Corp.

Padilla said that the hedge fund has been “less than transparent and frustratingly inconsistent” in the “negotiations for the acquisition of the properties for the 950 Center for Art & Education project.” He is asking Tenderloin and Mid-Market stakeholders to write a letter to the hedge fund urging the group to pledge that the 950 Center concept will be part of any redevelopment there.

Loan Star declined to comment through a spokesperson. Commercial real estate brokers familiar with the situation said that Loan Star has decided to put the property up for sale in 2013 rather than do an off-market deal with the 950 Center proponents. The hedge fund has already sold two other Market Street properties it acquired through the purchase of a portfolio of troubled loans on which bankrupt Commonfund had defaulted. One of them, 901 Market St., was sold to Hudson Pacific for $90 million, a 28 percent increase over what the property had traded for in 2006; the other, 935-965 Market St., was unloaded to real estate developer Cypress Equities, which is expected to break ground early next year on a 250,000-square-foot retail project there called Market Street Place.

Sources who have talked to Lone Star said it thinks the 950 Project property will become more valuable once Cypress starts work on Market Street Place.

“Loan Star is a real estate firm that has a fiduciary responsibility to get the highest and best use,” said Thacher, who has spoken to Loan Star executives. “They are trying to get the highest price they can get.”

Padilla said that Loan Star used the ambitious plans for the 950 Market project as a selling point when marketing 901 Market and Market Street Place. But as soon as those properties were unloaded, the conversations stopped.

“These guys really strung this thing out for a while and the community got taken for a ride here,” he said. “They played nice with 950 Market because they needed our help and support.”

Padilla said the 950 Market group has been in talks with housing developers that might be interested in being the master developer on the project, including AvalonBay, Bridge Housing, Build Inc. and Group I, which recently bought the Warfield office building at 988 Market.

In a letter to Mayor Lee, A.C.T. Executive Director Ellen Richard said she is worried that as companies such as Twitter, Square and Dolby relocate to Mid-Market, the arts groups that have long been housed in the neighborhood will be priced out. “If a sizable organization like the A.C.T. can’t afford these new market rents, then what chances do smaller organizations have?”

Thacher remains hopeful that the 950 Market project will come to fruition.

“We see the revitalization of Mid-Market with tech companies and investment going on, but you don’t want it to be carried away and forget the history of Market Street as an arts and entertainment district,” said Thacher. “It’s important to help small theaters and arts groups that desperately need a permanent home.”

But until Loan Star decides what to do with its property, all bets are off.